Today shares of Elanco Animal Health have fallen -3.9%, to a price of $12.1. Since it has an average rating of buy, many investors will be using today as an opportunity to buy the dip. But what if the stock is overvalued? Don't blindly trust analyst ratings before looking at the fundamentals yourself!
Elanco Animal Health has a P/E ratio of 29.5 based on its 12 month trailing earnings per share of $0.41. Considering its future earnings estimates of $0.94 per share, the stock's forward P/E ratio is 12.9. In comparison, the average P/E ratio of the Health Care sector is 26.07 and the average P/E ratio of the S&P 500 is 29.3.
We can also compare the ratio of Elanco Animal Health's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. ELAN has a P/B ratio of 0.92, with any figure close to or below one indicating a potentially undervalued company.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Elanco Animal Health's quick ratio is 1.055. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
Next up in our analysis is Elanco Animal Health's levered free cash flow, which stands at $197.0 Million. This represents the cash that is available to the company after all of its expenses and income are accounted for -- including those that arise outside of its core business activities. This money can be used to re-invest in the business or to payout a dividend. For now, at least, Elanco Animal Health has chosen the former.
At Market Inference, we will keep monitoring Elanco Animal Health to see if the analysts were right to recommend the stock despite its valuation issues. We recognize that numbers don't always tell the whole story, and that qualitative factors often set high performing investments apart from the rest.
